What Are Gann Angles?
Gann angles are named after their creator W.D. Gann. Gann believed the angles could predict future price movements based on geometric angles of time versus price. Gann was a 20th-century market theorist. The validity and usefulness of his theories, however, are subject to debate.
Several Gann angles used together make up the Gann fan.
- Gann angles are based on the 45-degree angle, known as the 1:1 angle. Gann believed the 45-degree angle is important and trends above it are strong and trends below it weaker.
- Gann angles are applied from price bottoms extending upwards or from price tops extending downwards.
- Other Gann angles include 2:1, 3:1, 4:1, 8:1, 1:2, 1:3, 1:4, 1:8. The theory is that as price moves through one angle, it will gravitate toward the next.
What Do Gann Angles Tell You?
According to Gann, the ideal balance between time and price is 45 degrees. In total, there are nine different Gann angles for identifying trends and market actions. When one of these angles is broken, the price is expected to move to the next angle.
According to Gann, the most important angle is a line representing one unit of price for one unit of time, now widely regarded as the 1:1 (sometimes denoted as 1x1) and is the 45° angle. In this instance, the value of a commodity or stock which conforms to a 1:1 angle is said to increase by one point per day or price bar.
In reality, a trader can fix the ratio to whatever they want, as long as they remain consistent. With the S&P 500 at 3,000, one point a day is a minuscule movement. So instead, the trader could fix the ratio at 10 points per day, or 30, and that would be the 1:1. Alternatively, open a chart, draw an angle at 45 degrees on that chart then overlay the Gann angles with 1:1 aligning with the 45-degree angle.
When using Gann angles, it is important to lock the scale on the price chart. Most charting platforms adjust the scale when zooming in or out. That changes the angle. Locking the scale prevents this.
The other Gann angles are 2:1 (moving up two points per time unit), 3:1, 4:1, 8:1, and 16:1, as well as 1:2, 1:3, 1:4, and 1:8. These movements are not limited to up moves. These are also applied to downtrends. 1:8 means that the price is moving up eight price units each period; 3:1 means it takes three time periods to move one price unit.
Example of How to Use Gann Angles
The application begins with tracking and waiting for tops and bottoms to form on a chart. The Gann angles are then applied. A Gann fan or Gann angles indicator is available in most charting and trading platforms, with the above-mentioned angles included.
When the trend is up, and the price stays in the space above an ascending angle without breaking below it, the market is regarded as strong. When the trend is down, and the price remains below a descending angle without breaking above it, the market is considered weak. Depending on which angle it is respecting shows the overall strength or weakness of the trend.
The idea is that if the price passes through one angle, the price may be heading toward the next.
Gann fans have been applied to a chart of the SPDR Dow Jones Industrial Average ETF (DIA). The first angles were drawn off the late-2018 low. Angle 1:1 is drawn at a 45-degree angle. Over time, the uptrend gradually began respecting the 3:1 angle.
The price then dropped further. As the price declines, it eventually breaks through all the up-trending angles. At any time during the decline, Gann angles can also be applied to the high price point, descending lower. 1:1 is once again aligned with 45 degrees. An angle tool may be used to make sure that 1:1 is at 45 degrees.
The Difference Between Gann Angles and Trendlines
Gann angles are drawn at specific angles, regardless of how the price moves. Trendlines connect swing lows to swing lows, and swing highs in price to swing highs. The indicators are providing different information. Gann angles were not meant to be drawn along price action; they are independent of it.
Limitations of Using Gann Angles
Gann created his own charts, creating his own scales for time and price movements. Most charting platforms today auto-scale data to fit the screen provided. While a 45-degree can be drawn on any chart, if someone has a different scale (numbers showing) on the x- or y-axis, their angles will intersect at different time and price points. Therefore, every trader, unless their charts are identically scaled, will have different angles. This means the indicator is subject to great subjectivity.
This indicator is not particularly useful for actual trade signals. Indeed, the price often does not proceed directly, if at all, to the next Gann angle once an angle is broken.